Saving for Tuition vs. Retirement: Which is More Important?

After watching their retirement funds get pummeled by the financial crisis at the same time the cost of college tuition continues to rise, many parents are faced with a difficult choice: contributing towards their children’s education or funding their retirement.

According to a recent study conducted by Allianz Life Insurance,one in four people are reducing or cutting off contributions toward their children’s college education. The study also reported that 25% of U.S. households are contributing less toward their children’s college education or have stopped altogether, while 44% of respondents have not started saving at all. Only 15% have cut back their spending on other things to keep saving/paying for their children’s college educations.

Jim Briggs, co-founder of ReducingCollegeCosts.com explains that families saving for college face a different reality than they did before 2008.

“Most families that we deal with are now taking a really hard look at the cost of educating their children and trying to get that down to the lowest common denominator,” he says. “But when you get right down to it, given a finite amount of assets and income, it’s how do you take what the family has and maximize their return on those for both retirement and education.”

So what’s more important, parents’ retirement or childrens’ college? The answer, according to most experts, is retirement.

“In a perfect world, you’d like to move forward on two fronts, and while there are plenty of difficult decisions around investing a limited amount of money, this isn’t one of them,” saysMichael Kiley, CEO of Security Benefit. “When it comes to saving for your child's education or saving for your own retirement, you have to put the kids second.”

Experts also advise parents to remember that there are loans available to fund college—that’s not the case with retirement.

Jeff Rose, certified financial planner and author of the blog “Good Financial Cents”, explains that parents are often willing to sacrifice their future plans to avoid putting the burden of financial responsibility on their kids.

“It's in my belief that eventually it'll all circle back around that they'll have to be dependent on their children, because they didn’t have adequate retirement savings,” he says.

Involve the whole family in the process. When deciding what schools to apply to, students and parents should make realistic, informed decisions together about what they can afford, says Briggs.

“It’s a subject that weighs on the minds of the parents because they don’t want to say to their children, ‘we can’t afford to send you to a certain school,’ but they’re having to do that through necessity,” he says.

Parents may feel uneasy or awkward discussing finances with their children, but it’s important that children know that how much in loans they would have to take out to fund their education.

“This new focus on finances and net price forces both the parent and student to really become a lot more thoughtful about where they can go to school, both from a financial standpoint and from a field of study standpoint,” Briggs says.

Know how to compare schools. To get a true sense of cost, families should compare the sticker price of a school, the advertised price of attendance, with the net cost, which factors in grants or scholarships.

Although parents may not want to limit their children from applying to their dream schools, Briggs says that cutting the cost of education as a whole can allow parents to help their children with tuition and still be able fund their retirements.

“A lot of families are having to choose the state school [or] are having to start out on the community college level and then take those credits and transfer them to the state school,” he says.

Understand student loan options. Briggs say he has seen a decrease in parents’ desire to borrow for education.

“They’re just uncertain about the future, they’re uncertain about their retirement, and they don’t want to saddle themselves with these huge student loan obligations,” he says.

Families who need financial assistance should seek out all federal student aid opportunities. Rose advises parents guide their kids through the process, but let them do most of the work to make them more prepared when it comes to repayment.

“Make them understand how much it's really going to cost them once they graduate if they have $20,000 of debt, $40,000 of debt, or $80,000 of student loan debt,” he says. “It's just as important to help them realize that there are plenty of scholarships and other opportunities available to where they don’t have to take on student loan debt.”

Although it may not sit well with parents to know their children will spend years paying off the debt, parents have to think about their own long-term goals, says Kiley.

“You or your children can borrow for college--you cannot obtain a loan to pay for retirement.”